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Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?

Barnett, William A. and Kalonda-Kanyama, Isaac (2012): Time-varying parameters in the almost ideal demand system and the Rotterdam model: will the best specification please stand up?

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Abstract

We use Monte Carlo simulations to assess the ability of the Rotterdam model and the three versions of the almost ideal demand system (AIDS) to recover the time-varying elasticities of a true demand system and to satisfy theoretical regularity. We find that the Rotterdam model performs better at recovering the signs of all the time-varying elasticities. More importantly, the RM has the ability to track the paths of time-varying income elasticities, even when the true values are very high. The linear-approximate AIDS, not only performs poorly at recovering the time-varying elasticities but also badly approximates the nonlinear AIDS.

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